As usual, Brad Feld has done a nice job explaining "the dreaded confidentiality/non-disclosure agreement" with regard to M&A. I was going to write a post on this subject in the future, but since Brad has started, let me add my $0.02.
First, from the CorpDev side I agree with Brad, as usual. I have no problem signing a strong CA that's bi-directional. It's usually easier and faster to use the buyer's form, but it's worth every penny in legal fees to have your attorney review and explain.
Second, if you're negotiating exclusively with one potential buyer a strong CA is important. However, if you've decided to proactively sell your company through a process that includes several potential buyers, then the CA is imperative to both seller and ultimate buyer.
There are a couple of things that quite a few sellers forget to put in, especially if you're using the buyer's general form CA:
- Scope - The scope of the CA usually includes everything and the kitchen sink, so the fact your company is considering selling should be implicit, right? Don't assume so. Make it explicit.
- Survivability - If you are marketing to several potential buyers, the agreements have to survive the transaction. Again, this may be implicit in the deal docs, but I need it explicit in the CA. As a potential buyer, I will pass on a deal if the seller has signed CAs without this provision.
- Non-solicitation - This restricts the potential buyer(s) from directly recruiting the seller's employees for a period of time. This is incredibly important to me if you are dealing with multiple bidders.
When I am considering buying a company through a sale process where others are also kicking the tires, I will pass on the opportunity if the CA doesn't have teeth and these key provisions. Here's why - the first thing I do after I sign an LOI is ask to see all of the CAs. If I don't like the edits, you've just queered the deal for me. The last thing you and I need is for a bunch of other companies telling your market and employees that the company is for sale.
Here's a good example of how it's done wrong. It's a true story with the names changed to protect the not-so-innocent:
Big Software Co. is the leader and largest player in its segment. Its salty-old-timer CEO (a term of endearment) got a call one day from blue-chip investment banker who indicated that a company in its segment was for sale and wondered if he would be interested? Salty-old-timer CEO was intrigued not interested, but he was willing to sign a CA in return for a shiny book. Very-junior banker emailed salty-old-timer CEO the standard CA, who made one minor edit and sent it back. Very-junior banker asked over-worked Selling Co. CFO if edit was fine. Over-worked Selling Co. CFO saw no problem with it, and the CA was done. Now the edit was to the non-solicitation clause which had an exemption for indirect and general solicitations, including: want-ad, job boards, etc. Our salty-old-timer CEO added two words to the including section: billboards and signs. Big Software Co. opted out of the deal and returned its shiny book. Meanwhile, salty-old-timer CEO hired a commercial real estate broker and quietly rented space across the street from Selling Co, which was eventually sold to Behemoth Software Conglomerate. On the day the deal closed, a huge sign was hung from the new satellite offices of Big Software Co. announcing that they were hiring programmers, engineers and sales reps. Sixty days later they had 41.